Microchip Technology (MCHP)
AI Hype Takes You Only So Far
Microchip Technology (MCHP) has gotten caught up in AI fever. Executives say the great majority of growth is from data centers. They call data centers part of their “megatrend” segment and say their products serve the “bleeding edge” of AI technology. On the strength of those pronouncements, plus claimed recovery from overstocking, MCHP’s share price is up 46% since the start of the year and still near the all-time high hit on May 7, 2026.
The problem is that the company’s Data Center and Compute revenue has actually declined sharply over the last four years, despite a data center capex boom taking place all around. Although the sub-category dedicated to data centers alone—only recently broken out—is growing, it is only around 7% of the business.
MCHP cannot scale its Data Center Solutions Business Unit, which sells products exclusively to data centers, without a whole different cost profile, and there is no evidence that the company is gearing up to support that fast growth. Capital expenditures are far below rates of depreciation, and capex projects already in place have been slowed down. MCHP is the lowest in a group of nine competitors for the proportion of capex spent relative to depreciation, in a field in which modern equipment is key to competitiveness. Should MCHP plan continued growth in its data center business, older machinery may not cut it.
While we see demand recovery from the disappearance of customer inventory overhang, we find it difficult to believe demand will return to levels when customers were over-ordering, and in that demand period, MCHP’s share price was lower than it is now. Customers have also been lost in the past two years, and there is no guarantee they will return.
MCHP has stiff competition in its most promoted category. Broadcom and Marvell, for example, sell many billions of dollars’ worth of the same sorts of connectivity gear to data centers, with sales to data centers at $4 bln for Marvel in 2025, with 88% growth, and $20 bln for Broadcom, representing 65% growth. MCHP data center sales were reported at $302.7 mln. Growth in the current year is hoped to be 67%. But we believe that this growth is capped by MCHP’s internal capabilities as well as by competition and pricing pressure. Data center sales are also still a small part of MCHP’s business. That leaves MCHP as a company looking slower-growing than its highly priced shares suggest.